Agricultural Credit, Who is Benefitted !

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As per a report submitted by the RBI to the Parliamentary Standing Committee on Agriculture in response to its queries, only 42.2 percent of agricultural credit disbursed in 2016-17 went to small and marginal farmers. The small and marginal farmers are missing out on the bulk of agricultural credit, as per information provided by the Reserve Bank of India, which showed they are receiving only 30-40 percent of loans meant for the sector.

The RBI’s rules are that 18 percent of a bank’s Adjusted Net Bank Credit must go to the agricultural sector and within this, 8 percent must go to small and marginal farmers. While the banking sector has overall met this limit, there is still an inherent targeting problem arising out of the costs of lending to the sector. “There are two ways of seeing this,” Bharat Ramaswami, Professor at the Indian Statistical Institute and agricultural economy expert said. “One is that it is not equitable, where some farmers, the larger ones and the ones closer to urban areas, are over-represented in terms of access to credit. Insofar as the priority sector lending mandates are concerned, the mandate is not to reach a particular type of farmer. So, the programme itself is not targeted.” “The priority sector lending mandate is in place because it is felt that banks would not otherwise lend as much to this sector,” Professor Ramaswami further added. “So, there are some costs of lending to this sector, and if they are not given this mandate, because of this cost they would not lend as much to the agricultural sector as the government would like them to.”

What then happens, he explained, is that banks choose to lend to those areas where the cost of lending is lower, such as those close to urban areas, or to those farmers who are more credit-worthy. That is, the medium and large farmers.

The RBI data backs up this assertion, showing that only 34.5 percent of agricultural credit outstanding as of 2017 has gone to rural farmers. The remaining has gone to semi-urban, urban, and metropolitan farmers. “The point is that these farmers would get credit even without the priority sector lending mandate,” Professor Ramaswami added .

“It tells you that this calls for a deeper examination of the priority sector lending mandates.”

The data also shows that the onus of providing agricultural credit is falling on the public sector banks, with 12 out of 23 of the private sector banks for which data is available having failed to meet the 18 percent lending target for the agricultural sector in 2017.

“The point is that these farmers would get credit even without the priority sector lending mandate,” Professor Ramaswami said. “It tells you that this calls for a deeper examination of the priority sector lending mandates. Maybe the limit can be reduced, but the rules can be made stricter about to whom the loans are given to.”

The data also shows that the onus of providing agricultural credit is falling on the public sector banks, with 12 out of 23 of the private sector banks for which data is available having failed to meet the 18 percent lending target for the agricultural sector in 2017. This number was as high as 16 in 2015.

The data also shows a great disparity of performance between states, with some states such as Meghalaya giving 93.6 percent of its agricultural credit to small and marginal farmers, while other states like Sikkim have this proportion as low as 1.67 percent . While some of this could be explained by the distribution of farmer types in these states, a large part of the discrepancy could be due to a targeting problem.